Sometimes things don’t always go as planned. Unexpected car repairs can blow your monthly budget. If the illness persists, completion of large projects may be delayed.
This is especially true when it comes to central planners’ plans. A five-year plan may list specific goals and objectives. You can also outline a roadmap to achieve this. But reality has a way of veering off the intended path.
The Federal Reserve began its rate-cutting cycle on September 18, when the 10-year Treasury yield was around 3.70%. Despite the Fed’s subsequent 1.00% interest rate cut, the 10-year Treasury yield is now 4.60%. The government bond market, represented by 10-year maturity Treasury bonds, is showing a different behavior in response to the Federal Reserve’s interest rate cut.
One possible reason is that the Federal Reserve erred in declaring ‘mission accomplished’ in the fight against consumer price inflation. The Federal Reserve believed that the moderating rate of consumer price inflation would continue. You have set the price trajectory, and soon the price will reach an arbitrary 2% target.
The core personal consumption expenditures (PCE) index, excluding food and energy prices, was recently 2.8% Over the last 12 months. Once again, the Fed is wrong about inflation and needs to change its plan.
For example, the recent FOMC dot plot currently expects two interest rate cuts in 2025. This is down from the four rate cuts predicted in the previous dotplot. Perhaps FOMC members, like investors in 10-year Treasury bonds, have realized that rising consumer price inflation is here to stay.
But what else could happen?
Headwind blowing in Europe
Continued consumer price inflation means interest rates should remain higher. This is consistent with recent movements in 10-year Treasury yields. It’s also prompting the Federal Reserve to recalibrate its rate-cutting plans.
But what if FOMC members and Treasury investors are missing something? What if we’re missing the causes and consequences of the economic headwinds blowing through Europe? What happens if recessions in Germany and France cause government bond yields to fall in 2025?
This was a sentiment shared this week by Louis Navellier of the Navellier & Associates family office. Navellie assume That:
“The global interest rate collapse has just begun. Specifically, the European Central Bank plans to cut the benchmark interest rate four to five times in 2025 until the interest rate reaches 2% to 1.75%. Most Fed observers and the FOMC itself do not yet expect all of these global dominoes to fall as the recession in Germany, the euro zone’s largest economy, worsens. France, the second-largest economy in the Eurozone, is also falling into an economic recession.
“Falling global interest rates will trigger capital outflows into US Treasuries, pushing down yields. “The Fed never beats market rates, so I’m confident the central bank will cut U.S. benchmark interest rates four times in 2025.”
If Navellier is correct, this means interest rates will fall in 2025 even if consumer price inflation continues to rise. Lower interest rates generally encourage more borrowing and spending. Moreover, the impact of low interest rates often shows up in stock market prices.
What to make?
Significantly overrated
America’s major stock market indices are already at bubble prices. The idea that this bubble could expand further in 2025 is completely irrational.
A look at the S&P 500 shows that the broad market indices are near all-time highs. In fact, the S&P 500 has more than 50 record highs in 2024. It has risen 27% since the beginning of the year.
But looking at prices alone gives an incomplete picture. The real question is whether the S&P 500 has the earnings to support its soaring prices.
The current value of the S&P 500 compared to its historical value since 1871 shows that there is significant risk in the stock market. that Periodically adjusted price return The (CAPE) ratio is 38.35.
This is more than 123% higher than the long-term historical average for the CAPE ratio and significantly higher than the 32.56 CAPE ratio reached in September 1929. The only time the CAPE ratio was higher was for a brief moment at the peak of the dot-com bubble in December. It recorded 44.19 in 1999, and 38.58 in October 2021.
The stock market sold off after the CAPE ratio peaked in September 1929, December 1999, and October 2021. The first two were massive market crashes. The recent sell-off has led to a bear market in 2022.
Simply put, based on current CAPE ratios, the S&P 500 is priced at well over twice its historical average. NASDAQ and DJIA are both at nosebleed levels.
likewise, Buffett Indicatorsthe ratio of market capitalization to gross domestic product, shows that the stock market as a whole is significantly overvalued. The current ratio is around 206%.
Fair market value is a ratio between 108 and 132%. Anything above 156% is considered significantly overvalued.
Something unexpected will happen in 2025
The surest way to make money in the stock market is to buy low and sell high. Conversely, buying high and selling low is a sure way to lose money. Based on current valuations, buying a major U.S. stock market index now would be a high buy.
Perhaps you can buy at a high price and sell at a higher price. Although it is completely irrational, there is a possibility that the stock market bubble will expand further. By definition, bubbles are irrational.
Nonetheless, buying high to sell at a higher price is not a recommended investment method. Not unless you think of gambling as an investment.
Successful long-term index fund investing requires buying when market indices are cheap, i.e. when the CAPE ratio is below 15 or the Buffett Index is below 84%.
Based on the CAPE ratio and Buffett metrics, the US stock market is significantly overvalued. But if Navellier is right, capital outflows from European markets to the U.S. and central bank credit pumping could further inflate stock markets in 2025.
What this means is that the major U.S. stock market indices could crash sharply as the new year begins. Plus, this melting could be particularly spectacular. Therefore, the risk of a catastrophic collision is rarely greater.
So our advice for the new year is to expect the unexpected in 2025. A huge crash. Both. Neither. All of this could happen by 2025.
Holding a small portfolio of dividend stocks with predictable returns and increasing your exposure to cash is a prudent approach. And of course, given the stress on the financial system, it is very important to hold physical gold and silver bullion coins as a safeguard against inflation and financial crises.
It’s going to be wild.
happy new year!
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published an important special report called, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If discovering how this little-known aspect of American history can make you rich is of interest to you, then I encourage you to pick up a copy. It will cost you less than a penny.]
thank you,
minnesota gordon
for economic prism
Return to the economic prism from unexpected expectations in 2025
